Large feed grain stocks set the stage for low prices

This past year marked the first time in the new millennium in which more feed grains were produced globally than were consumed, setting the stage for significantly lower corn prices, says John McKissick of the University of Georgia Center for Agribusiness and Economic Development.

McKissick presented the corn marketing outlook during the recent Georgia Corn Short Course held in Tifton.

“If you go back and look, you’ll see that we’ve had relatively good prices in feed grains since 2000,” says McKissick. “But 2004 was the first year in which we produced more feed grain globally than we consumed. That’s because of the large stocks we’ve accumulated over the years.”

One reason for lower prices is that in 2004, the United States had its highest planted corn acreage since the mid-1980s, he says. Some market analysts are predicting that U.S. corn acreage might be up again this year, he adds.

“But we’re thinking that U.S. corn acreage is likely to be down some. The reason for that projection comes from the input cost side and how corn fits relative to some of the other crops grown in the United States. The price situation also fits into this projection,” says McKissick.

Extremely high yields in 2004 — much above the trend line — also contributed to higher stocks and lower prices, he says. “When you combine a slight increase in acreage with a much larger increase in yield, you can see how we could get into our current stocks situation,” he says.

Another part of the outlook, says McKissick, is the unknown — corn yields for this next year. “The safe bet is to say we’re not likely to have those kind of yields again or that they would be somewhat less than in 2004. If the yield falls back along the trend line, we’d be looking at something in the 120 to 123 bushels per acre range. If you factor in such a return to trend corn yields, this next year would be sort of an average year, along with a reduction in acreage.”

If the United States ends up with trend yields and a slight reduction in acreage, the market still will be contending with almost twice the carry-in from the previous year, he says. “That will cushion any fall we have in production.”

On the demand side, McKissick says lower prices have brought about a much larger demand. “We have a record demand to go along with a record crop in 2004. And, if we continue that into 2005, we will exceed that demand, on a reduced production, even including the added carry-in.”

The biggest part of demand is on the feed use side, he says, and that remains relatively stable at about 6 billion bushels. “There hasn’t been a lot of change there. You would think export demand might be up significantly for corn, but there hasn’t been a lot of change, and we’re not projecting a lot of change going into 2005.”

The “food, seed and industrial uses” side of the demand equation has been growing and will continue to grow into 2005, says McKissick.

The feed use side of demand is highly dependent on the number of animals in the United States, he says. “Beef cattle producers are enjoying the best years of their lives. But, they’re enjoying that because cattle numbers are down. Hog numbers are basically stable. But the broiler producers are returning to the glory days, and they’re going to increase production by about 5 percent in 2005.”

Added together, the animal numbers equal a flat demand for feed use in 2005, he says.

Looking at exports, McKissick says everything tells us that the value of the dollar is down. “The problem is that the dollar value isn’t down against those countries where our exports are going, such as China and Mexico.”

A return to the yield trend line and a decrease in acreage would mean lower corn production for 2005, but the market still will be dealing with a carry-in of about 2 billion bushels, he says.

“Growing demand would leave 2005’s carryover stocks significantly reduced and back down to levels that were not too difficult for us to deal with. All of this might support a higher price for 2005.”

If the forecast holds true, says McKissick, the stocks-to-use ratio would be at about 10 percent. “That is, we’d have about 10 percent left over of what we’re using. That would put us back at a level that historically gave us relatively good prices.

“If that level is realized, the U.S. average price would be back up around the $2.50 level, and prices in Georgia range from 25 to 40 cents over the average U.S. price.”

Several things must occur for this to happen, says McKissick. “We need to get that decrease in acreage, and we’re contrarian on that because many of the market services have come out with forecasts for higher acreage and a return to trend yields.”

If acreage does decrease and yields return to trend levels, that might suggest, he says, that growers will want to hold off on forward pricing. Historically, the highest pricing opportunities for Georgia corn growers occur in January, February and March.

“You want to do some forward pricing during this time period, but you also want to leave yourself open on some of it, so if this outlook does work out.

“If we drop below trend yields due to weather problems, we could have higher pricing opportunities. You want to do some forward pricing now, but you also want to think about how much you want to leave yourself open to take advantage of any weather-driven rallies we might have.”